Private markets investors have been warned that the composition of recent defaults means that underlying stress has been deferred rather than resolved.
In a new report, David Hamilton, head of asset management research at Moody’s Analytics Asset Management Research, said that credit risk headlines “are moving in the right direction” and that “on the surface, things are looking calmer”.
However, he pointed to the “historically high share of credit events that are distressed exchanges rather than hard defaults” as a dynamic warranting further attention.
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Moody’s Ratings data showed an increase in distressed exchanges in 2025, when approximately 65 per cent of all corporate defaults were distressed restructurings, which includes workouts, indenture modifications, debt-for-equity swaps, and other “soft” credit events.
As a result, the proxy default rate for private credit (direct lending) ranges from 1.6 per cent, without distressed exchanges, to 4.7 per cent if they are included, and calls into question “how much stress has actually been resolved versus how much has simply been deferred”.
Hamilton, who drew on Moody’s Default & Recovery database covering 1,173 borrowers dating back to 1979, found that more than one in three distressed restructurings ultimately ends in either a hard default or a repeat credit event.
He said that the “hazard is heavily front-loaded”, given that more than 70 per cent of eventual hard defaults following a distressed exchange occur within the first two years.
This means borrowers that restructured in 2023 and 2024 are now entering their most vulnerable window and deserve “careful monitoring”, he added.
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Post-pandemic, many distressed exchanges were able to “stick” as a result of “a narrow but open refinancing window, lender forbearance buoyed by the expectation of rate cuts, and covenant structures flexible enough to absorb a workout without triggering a cascade”.
However, Hamilton suggested that several of those conditions are “now less certain”.
“Markets have sharply scaled back expectations for Federal Reserve rate cuts in 2026,” the report said. “Moody’s baseline GDP growth forecast of ~1.5 per cent sits just above the historical ‘stall speed’, below which credit events tend to accelerate.
“Recent inflation data, and the renewed possibility that higher rates could be back on the menu, disproportionately pressures the floating-rate borrowers who are most heavily represented in private credit portfolios.”
Hamilton said that, against this backdrop, issuer-level diligence will be rewarded above “top-down optimism”.
“Falling default rates are real and welcome,” he added. “But the composition of those defaults, which are heavily weighted toward soft credit events that often defer rather than resolve underlying stress, means the improvement in headline numbers may be slower and more fragile than it appears.”
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